What a difference a month can make. It was only a few weeks ago that pundits were expecting another rate hike, early in 2024. But in recent days, the psychology appears to be switching, with rates now predicted to be cut at least twice around mid-2024.

Of course when you consider that, as recently as 2022/23, the RBA’s own estimations were that inflation was under control and that rate hikes probably wouldn’t be needed until 2024, you might want to take these predictions with a grain of salt. That said, this ‘tug of war’ between rate hikes vs cuts does indicate that inflation, and by extension, interest rates, appear to be peaking. Famous last words?

In the US, their central bank is about six months ahead of Australia and is on the verge of defeating inflation without casing a sharp rise in unemployment (a ‘soft landing’) - if successful, an extremely rare achievement. The Fed is now clearly signalling the it intends to begin cutting rates this year, possibly as soon as March…

Fed Chair Jerome Powell said last month that “you want to be reducing restriction on the economy well before 2%,” and that waiting to cut rates until inflation reaches 2% would “be too late.” Inflation is currently running below 3%, according to the PCE, and central bank officials have signaled that rates are well into “restrictive” territory.

Back in Australia, the next round of tax cuts, proposed cost of living payments, and an expansion of the Middle East war (ie Iran gets directly involved) are just some of the ‘known knowns’ that could change the inflation calculus, so ‘watch this space’.

Rick Maggi